Fundamentals Of Bankruptcy Law, Sixth Edition

ALI-ABA Course of Study

Fundamentals of Bankruptcy Law

May 7 - 9, 2009

Chicago, Illinois

Fundamentals Of Bankruptcy Law, Sixth Edition

Sixth Edition By Richard B. Levin

George M. Treister of the California Bar

J. Ronald Trost of the California, District of Columbia, New York, and Texas Bars

Leon S. Forman (1915-2006) of the Pennsylvania Bar

Kenneth N. Klee of the California and District of Columbia Bars

Richard B. Levin of the California, District of Columbia, and Massachusetts Bars

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Fundamentals

Of Bankruptcy Law

Sixth Edition

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As of July 2006

American Law Institute

American Bar Association

Continuing Professional Education

Board of Directors

President

Thomas Z. Hayward, Jr. Chicago Illinois

Honorary Chairs

Michael Traynor San Francisco California

President, American Law Institute

Michael S. Greco Boston Massachusetts

President, American Bar Association

Tsan Abrahamson Berkeley California

Brooksley E. Born Washington District of Columbia

Bennett Boskey Washington District of Columbia

Michael E. Flowers Columbus Ohio

Roy A. Hammer Boston Massachusetts

Lance Liebman New York New York

John J. McKetta, III Austin Texas

Leslie B. Miller Tucson Arizona

M. Peter Moser Baltimore Maryland

James R. Myers Washington District of Columbia

Emilie R. Ninan Wilmington Delaware

Bettina B. Plevan New York New York

Maury B. Poscover St. Louis Missouri

Barbara J. Rothstein Washington District of Columbia

Robert A. Stein Chicago Illinois

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Related ALI-ABA Publications

Strategies For Secured Creditors In Workouts And Foreclosures

by Patrick E. Mears, William T. Burgess, Daniel F. Gosch, Michael C.

Hammer, Edgar C. Howbert, and James A. Plemmons; 2004; hardbound; 304

pp.; future supplements invoiced separately and may be returned without

obligation; Order Code BK25; $99 plus $8.50 shipping/handling

Bankruptcy Litigator’s Handbook

by John Silas Hopkins, III; hardbound with 1997 Supplement; 522 pages; $89

(includes postage and handling); Order Code B437K

To order, please send your request with payment to ALI-ABA, 4025 Chestnut

Street, Philadelphia, PA 19104-3099. If using a credit card, please call 800-

CLE-NEWS, ext. 1650; fax orders to 215-243-1664; or go to www.ali-aba.org.

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Fundamentals

Of Bankruptcy Law

George M. Treister

of the California Bar

J. Ronald Trost

of the California, District of Columbia, New York, and Texas Bars

Leon S. Forman (1915-2006)

of the Pennsylvania Bar

Kenneth N. Klee

of the California and District of Columbia Bars

Richard B. Levin

of the California, District of Columbia, and Massachusetts Bars

Sixth Edition By

Richard B. Levin

4025 Chestnut Street | Philadelphia, Pennsylvania 19104-2899 | www.ali-aba.org

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Library of Congress Catalog Number: 2006931754

© 2006 by Skadden, Arps, Slate, Meagher & Flom LLP.

All rights reserved.

Printed in the United States of America

ISBN: 0-8318-0869-1

John B. Spitzer of the ALI-ABA staff

edited this book.

Nothing in this publication should be considered as the rendering of legal

advice. Non-lawyers should seek the advice of a licensed attorney in all legal

matters. Readers should assure themselves that the material in this publication

is still current and applicable at the time it is read. Neither ALI-ABA nor the

author(s) can warrant that the material will continue to be accurate, nor do they

warrant it to be completely free of errors when published. Readers should ver￾ify statements before relying on them. The materials in this publication reflect

the viewpoints of the author(s) and do not necessarily express the opinions of

ALI-ABA Continuing Professional Education or its sponsors.

ALI-ABA has a history of outreach to underrepresented groups in the legal

community and is firmly committed to providing a welcoming environment and

ensuring that the attorneys who speak and write for our organization represent

the increasing diversity of our profession. We welcome suggestions for new

speakers and authors, especially from underrepresented groups in the legal

community, to support the full participation of all of the talent in our profession.

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Foreword

Fundamentals of Bankruptcy Law is a clearly written and easily absorbed

explanation of a complex and difficult area of the law that is, to a large de￾gree, prescribed by statute. Its unique format also facilitates understanding:

The text is printed only on right-hand pages because left-hand pages are

reserved for the reproduction of relevant statutory language. Provisions

appear opposite the text that discusses them, whenever pertinent. This book

has been well received and both its format and content have been highly

praised.

George M. Treister, J. Ronald Trost, the late Leon S. Forman, Kenneth

N. Klee, and Richard B. Levin have collaborated for many years in the pres￾entation of basic and advanced ALI-ABA Courses of Study on bankruptcy

law. From the outset, their written course materials were of such quality and

character that practitioners also found them useful in their law offices. In

1986, ALI-ABA first offered Fundamentals of Bankruptcy Law, an exten￾sively updated version of those materials in book form. To accommodate

amendments to the Bankruptcy Code and revisions of the Bankruptcy Rules,

as well as significant federal cases, new editions were issued in 1988, 1993, and

1996, and 2004. This sixth edition, by Richard B. Levin, incorporates the

major amendments made to the bankruptcy laws by the Bankruptcy Abuse

Prevention and Consumer Protection Act of 2005.The skill of the authors in

introducing general practitioners to this sometimes intimidating subject

uniquely qualifies them to guide the reader through an initial exploration of

the bankruptcy system.

American Law Institute-American Bar Association Continuing Pro￾fessional education is again grateful to the authors for generously sharing

their knowledge and experience with the practicing bar. As speakers and

authors, they have helped thousands of lawyers expand their knowledge of

bankruptcy law.This new edition insures that their audience will continue to

grow.

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This text has become a classic and we are honored to offer this new edi￾tion, secure in the knowledge that it will continue to reach a wide audience

and to further quality education of the profession in this area of the law.

Mark T. Carroll

Director, Office of Electronic and Print Publications

American Law Institute-American Bar Association Continuing

Professional Education

August 15, 2006

viii • Fundamentals of Bankruptcy Law

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Preface

Bankruptcy law is widely regarded as a difficult subject. Although this rep￾utation is not entirely warranted, the Bankruptcy Code is indeed a lengthy,

technical statute. Moreover, the meaning of many of its sections is obscured

by the fact that language derived from the former Bankruptcy Act is often

carried forward into the Code laden with a considerable judicial gloss.

There are two principal difficulties to gaining an overall understanding

of bankruptcy law. First, the statutory provisions are highly interrelated.

Many sections are understandable only in the context of the overall Bank￾ruptcy Code. A real grasp of any part can be achieved only after there is a

grasp of the whole, which in turn depends upon learning the parts.

Second, in many respects bankruptcy is about procedure. The Bank￾ruptcy Code incorporates much of its substance from non-bankruptcy law

and establishes broad outlines of procedures for the conduct of bankruptcy

and reorganization cases. The detailed procedure, however, is governed by

and large by a separate package of Bankruptcy Rules promulgated under the

Supreme Court’s rule-making power. Reading the Code’s substantive sec￾tions before becoming familiar with the procedural glue that holds them

together and makes them work is challenging. On the other hand, reading

the Rules before becoming familiar with the substantive provisions they are

designed to implement is confusing, if not fruitless.

Therefore, it seems useful to begin the study with a broad-brushed, rel￾atively quick, general orientation. This book is intended to serve that pur￾pose. As sometime teachers, we were motivated to write it because of a felt

need for this kind of resource in our continuing legal education courses in

bankruptcy and business reorganization law, sponsored by ALI-ABA prima￾rily for general practitioners and for others who do not specialize in the insol￾vency field. We emphasize that the book is a primer, not a research tool,

although perhaps for some it may serve as a starting point for serious

research.The book deals mainly with fundamentals, but refinements are dis￾cussed at various places when they are necessary to an understanding of the

big picture or to the way the bankruptcy system actually functions.

Consistent with this approach, no attempt has been made to cite all or even

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a significant portion of the thousands of judicial decisions that have inter￾preted the Bankruptcy Code since it became effective in 1979.We think that

such detail would tend to obscure the overview we want to achieve. Citations

are included to the major decisions as an aid to beginning research or to

allow the reader to explore the contours of a particular point.

Although our effort is to explain simply and accurately the basic mean￾ing of the Bankruptcy Code, the beginning student cannot proceed confi￾dently without a focus on the statute itself.The book is intended as an aid to

the study of the Code, not as a substitute for it. The importance of careful

attention to the language of the statute explains the somewhat unusual for￾mat of the book. The book’s text is printed only on the right-hand, or odd￾numbered, pages, so that the important Code sections under discussion can

be reproduced close by on the facing pages. This format should facilitate

comparison of the precise statutory wording with what we have to say about

it.

Finally, some acknowledgements are in order. We are deeply indebted

to Sally A. Ulrich, formerly of the ALI-ABA staff, whose original assistance

in the preparation of the manuscript of the first edition of Fundamentals of

Bankruptcy Law has made this book better than it otherwise would have

been. John B. Spitzer of the ALI-ABA staff also provided valuable editorial

help with respect to the subsequent editions.

GEORGE M. TREISTER

J. RONALD TROST

LEON S. FORMAN (1915-2006)

KENNETH N. KLEE

RICHARD B. LEVIN

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We dedicate this book to our friend

Alex Hart.

His care for our personal comfort and

attention to every administrative detail

have made participation in the

ALI-ABA bankruptcy programs

a pleasure for all of us.

* * * * * * * *

I dedicate the Fifth Edition to my mentor, friend, and colleague

George M. Treister.

George has been an inspiration to bankruptcy teachers and lawyers

throughout the country. He has shaped the bankruptcy law through

his profound, innate understanding of the subject, through his years

of teaching bankruptcy judges and lawyers, and through his direct

participation in the drafting of the Bankruptcy Code and the Bankruptcy

Rules. His gentle and modest demeanor belies his influence and the deep

respect that the bench and the bar holds for him.

My interest in bankruptcy law arose first from my proximity to

George while I was in law school and profited from many more years of

proximity in numerous settings. He taught, encouraged, and challenged me,

served as a professional and personal role model, and has my deep

gratitude, affection, and admiration. —RL (2004)

* * * * * * * *

I dedicate this Sixth Edition to a bankruptcy scholar:

Leon S. Forman.

Leon was highly respected as a man of high moral character

who embodied a spirit of charity and decency, and who, by his

personal example, inspired the growth of knowledge, the improvement

of the law, and the achievement of professional and personal excellence.

Those of us who worked with him on this book and in his many other

efforts to teach and to improve the bankruptcy laws will miss him,

his insights into the complexity of the law, the clarity of his mind,

the depth of his knowledge, and his sensitivity to the human element

of our professional challenges. —RL (2006)

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